Bank of England Chief Economist Huw Pill said the slowdown in the UK economy together with the tight labor market conditions will put a lid on domestic inflationary pressures and weaken the risk of persistent inflation.
“Should economic slack emerge and unemployment rise as the latest MPC forecasts imply, that will weigh against domestic inflationary pressure and ease the threat of inflation persistence,” the economist said in a speech at an event in New York, late Monday.
“But the extent to which an easing in the labor market induced by monetary tightening will weigh against inflationary pressures will depend on the wider context,” Pill added.
A distinctive context that prevails in the UK is that higher natural gas prices with a tight labor market, adverse labor supply and bottlenecks in the goods market could create the potential for inflation to prove more persistent, Pill said.
At the December monetary policy meeting, policymakers repeated that if the outlook suggests more persistent inflationary pressures, the Monetary Policy Committee will respond forcefully, as necessary. This has placed the persistence of inflation at center-stage, said Pill.
Judging inflation persistence in real time is difficult and a persistent series does not change much from one MPC meeting to the next, Pill noted.
The UK central bank has raised its interest rates for nine consecutive meetings, taking the bank rate to its highest level since October 2008.
At the December meeting, echoing the US Federal Reserve’s move, the BoE softened the pace of tightening but cautioned that further increases might be required for a sustainable return of inflation to the 2 percent target.
The BoE’s next policy announcement is due on February 2.